TREASURIES-Yields drop after U.S. equities sell-off

* U.S. stocks meltdown pushes investors back to Treasuries
* U.S. PPI rises in September, core gains as well
* U.S. auctions show mixed results
* Bond market playing catch-up to Fed rate forecasts -
analyst
(Recasts, adds comment, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 10 (Reuters) - U.S. Treasury yields fell late
on Wednesday in a flight to quality as investors snapped up
government bonds in the midst of a sharp sell-off in U.S.
stocks.
Yields had been higher all day fueled by solid U.S. economic
data that reinforced expectations of multiple interest rate
hikes by the Federal Reserve over the next 12 months.
Investors, however, bought back Treasuries after the three
major U.S. stock indexes posted steep losses of between 3 and 4
percent on the day.
"It took a while before we got a bid in Treasuries, but
finally into the close, when the Dow was like down 800 points,
we did see buyers step in," said Kim Rupert, managing director
of global fixed income at Action Economics in San Francisco.
"Stock investors are a little concerned about rising rates.
But I don't think that's going to change sentiment at the Fed,"
she added.
In late afternoon trading, U.S. 10-year note yields were
last at 3.170 percent, down from 3.208 percent late
on Tuesday.
U.S. 30-year bond yields also fell to 3.355 percent
, versus Tuesday's 3.369 percent.
Also on Wednesday, the Treasury held two key auctions with
fair to modest results - $36 billion in U.S. 3-year notes, and
$23 billion in reopened 10-year notes.
The U.S. 3-year note sold at a yield of 2.989 percent, the
highest at an auction of this maturity since May 2007. The
bid-to-cover ratio, a measure of demand, was 2.56, which was the
lowest since July. The ratio was 2.68 at the previous 3-year
note sale in September.
The U.S. 10-year note, on the other hand, picked up a yield
of 3.225 percent, the highest since May 2011. The bid-to-cover
ratio was 2.39, the lowest since February, while the ratio in
September was 2.58.
Earlier, data on producer prices, which rose in September
after declining the previous month, added to the hawkish outlook
on interest rates as it suggested that inflationary pressures
were accelerating.
"The market for quite some time has under-appreciated the
Federal Reserve's rate hikes," said Bill Merz, head of fixed
income research at U.S. Bank Wealth Management in Minneapolis.
"Despite the meaningful repricing last week of rate
expectations, that gap still has to be resolved. We expect the
market to continue to catch up, which is more likely than the
Fed lowering its rate path."
Merz added that the disparity between the market's
expectation for rates and the Fed's forecast underpins a big
component of U.S. Bank's view that calls for rising yields
across the curve.
October 10 Wednesday 4:42PM New York / 2042 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 2.2275 2.2712 0.007
Six-month bills 2.3825 2.445 -0.005
Two-year note 99-208/256 2.8483 -0.041
Three-year note 99-126/256 2.9318 -0.050
Five-year note 99-100/256 3.0078 -0.049
Seven-year note 99-84/256 3.1079 -0.043
10-year note 97-128/256 3.1724 -0.036
30-year bond 93-68/256 3.3589 -0.010
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 18.50 0.50
spread
U.S. 3-year dollar swap 17.00 0.75
spread
U.S. 5-year dollar swap 12.25 0.00
spread
U.S. 10-year dollar swap 4.25 -0.25
spread
U.S. 30-year dollar swap -11.25 -1.25
spread
(Reporting by Gertrude Chavez-Dreyfuss
Editing by Richard Chang and James Dalgleish)